Senate consultants assess legislation's impact honestly

Posted: March 24, 2012 - 11:05pm

This editorial first appeared in the Fairbanks Daily News-Miner:

Critics of Gov. Sean Parnell’s call to lower Alaska’s oil taxes often claim the state’s existing rates fall in the mid-range among the world’s political jurisdictions and therefore deserve the same judgment Goldilocks bestowed upon Baby Bear’s cereal — “it’s just right.”

This persistent assertion indeed deserves company with Goldilocks, but for a different reason — it’s a fable.

State senators are among the most ardent opponents of the governor’s proposal. Yet the most recent presentation from the Senate’s own consulting firm, PFC Energy, documents reality at the expense of myth once again.

Speaking to the Senate Finance Committee last week, a consultant presented charts and analysis that explain why Alaska has difficulty attracting oil company reinvestment at a time of record profits: The total government take — state and federal — from oil produced in Alaska puts us squarely in the upper reaches of oil-producing regions. And that position is mostly because of the state’s highly progressive tax rate.

A PFC Energy consultant explained the situation for senators, and he wasn’t ambiguous. “Alaska’s government take has risen significantly over recent years, meaning new project economics can be very challenging.”

For existing producers in Alaska, PFC estimates, the total government take from a barrel of oil sold at $100 is 74 percent. Among the advanced countries in the Organization for Economic Cooperation and Development that PFC rated, that’s a higher government take than all but Norway. On new development in Alaska, the percentage is even higher — about 77 percent, PFC estimated, which exceeds even Norway’s take.

At higher prices — $140 per barrel, for example — the total government take in Alaska rises to about 77 percent on existing producers and 80 percent on new development, PFC said. Alaska again exceeds Norway in both those cases.

Those countries on PFC’s charts where total government take exceeds Alaska’s are in much lower-cost and sometimes politically risky regions. In descending order for new development at $100 per barrel, they are: Syria, Uzbekistan, Pakistan, Bolivia, Oman, Trinidad, Azerbaijan and Turkmenistan.

PFC summarized the effect of the state’s present tax regime, dubbed Alaska’s Clear and Equitable Share, on efforts to reverse the decline of oil production in Alaska.

“ACES appears to work well as a ‘harvest’ regime. Existing mature fields remain profitable ... Maximum ‘rent’ extracted from a declining production base is captured for the state,” the presentation slides explain. “ACES inhibits the development of new projects and resources that might help stem or even reverse the decline. ACES is not progressive with regard to costs, so high government take applies even to very high-cost projects. Progressivity can have a major detrimental impact on break-even prices for high-cost projects at current oil prices.”

Credit the Senate’s leadership for acknowledging these effects. The Senate’s alternative to Parnell’s proposal would tamp down Alaska’s progressively higher tax rates by a bit, in the interest of attracting investment.

However, the consultants said the Senate’s proposal, in the form of a committee substitute for Senate Bill 192, wouldn’t do much.

“On a current-year basis, government take under CSSB192 would be significantly lower than under ACES only at (Alaska North Slope) crude oil prices about $230,” according to PFC’s analysis. “On a profect-lifecycle basis, that threshold may be lower ... but the impact on project economics at likely price levels remains negligible.”

If Alaska wants to attract new projects, those projects need strong economics to compete with the rest of the world. Legislation with a “negligible” impact is not what Alaska needs.